You can't stop patting your back! You've gone through the All-Work-No-Play phase of your life and amassed a sizeable retirement corpus and now you intend to enjoy the All-Play-No-Work phase as retirement approaches.
Sorry to burst the bubble but that's not strictly true. This is the time to fine-tune your investment strategy - it's an ongoing process.
You have to constantly strive to see that your post retirement income is more than 100% of your pre-retirement income - not just 70% as is popularly touted. Especially with all the travelling and new hobbies you've planned, not to mention longer lives, increasing healthcare costs, insidious inflation and of course vagaries of returns on your assets.
Here are some things that will help you manage that nest egg and keep it going strong:
1. Don't for a minute think you'll live off the interest from your corpus. There will be withdrawals whether you like it or not. How much? Well, the amount needs to be just right: Not small enough to ruin your lifestyle but not big enough to drain your resources.
2. Constantly identify suitable products and streamline your portfolio. Diversification is of key importance, and that means having different asset classes that smoothens out the returns of your overall portfolio. Merely diversifying within an individual asset class will not help.
3. Continue to stay in touch with the latest occurrences in the financial world - what is true today might not necessarily be valid tomorrow. Tax rules keep changing, new financial products are launched daily.
4. Do not put off estate planning. You have created your assets and would like to distribute them to those who you feel deserve them. Create a will so as to distribute your property and funds the way you want to. You need to plan for the asset distribution so that they can be transferred or disposed of with the least possible costs and tax implications.
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5. Consider annuities when you take a payout from your retirement fund. You could also take a lumpsum and manage the money yourself but annuities provide the security of a contract purchased from an organisation that statistics say you cannot outlive.
However if you go your own way bear in mind:
i. Timing of returns
Early losses in retirement can undermine your long-term planning. The impact of withdrawals from your portfolio during a bear market can have irreversible effects on your portfolio and on its longevity.
ii. Dividends and Interest vs selling
You will most likely need to do both. Typically, a withdrawal of more than 4% from your assets is not advisable. Investments held in mutual funds should be held in dividend payout option after retirement as that gives you tax advantaged returns. Excess dividends can always be re-invested and also utilised when rebalancing your portfolio.
Also dividends received can be swept into a money market (liquid fund) account in mutual funds and you can withdraw from the same as and when you need it. Typically, you should maintain three months cash flows in your bank account to take care of your needs.
iii. Selling Investments
Ideally, you should take care of your cash flow needs as well as rebalance your portfolio. As you rebalance and reallocate your funds each year, you should take out whatever cash you would need before you reinvest the same in other assets. This would also help lower your fund management and transaction costs in the long run.
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iv.Taxation
Remember, you will not necessarily be in a lower tax bracket post retirement. Therefore, continue to seek high post tax returns as well as those, which take advantage of current tax structures while planning your investment.
Now you're no doubt thinking that retirement seems to involve a whole lot of work. Well, not really. A lot of this can be planned before you take the plunge. But yes, a little bit of work will continue even after. But remember - all play and no work makes Jack a dull boy!
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